Monday, November 4, 2013

Doing Good and Doing Well: Texas Corporations with a Social Purpose

The wall between for-profit and not-for-profit corporations in Texas may be tumbling.

Historically, under Texas corporate law, one could either:

(1) form a for-profit corporation, in which case the corporation ans its management team was expected to maximize shareholder value by maximizing profits for the benefit of the corporation's shareholders; or

(2) form a not-for-profit corporation, in which case the corporation and its management team was expected to pursue one or more social goals (such as enhancing education, culture or the arts) without paying any dividends or other economic benefits to any particular owner or investor.

The so-called "social entrepreneurship" movement has objected to this dichotomy.  Why shouldn't a corporation be allowed to pursue both profits and social benefits so long as the stockholders approved of the approach, this movement asked.  Under prior Texas law, officers and directors of a for-profit corporation might risk liability for breaching their fiduciary duty to the corporation if they pursued a social purpose at the expense of profits.  

But Texas law has become more social entrepreneurship-friendly.  Effective September 1, 2013, Section 3.007 of the Texas Business Organizations Code (TBOC) has been amended to authorize Texas corporations to include a social purpose in their certificates of formation.

Under the new law, "social purpose" is defined as: "promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment. Those impacts may include:
                      (A)  providing low-income or underserved individuals or communities with beneficial products or services;
                      (B)  promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
                      (C)  preserving the environment;
                      (D)  improving human health;
                      (E)  promoting the arts, sciences, or advancement of knowledge;
                      (F)  increasing the flow of capital to entities with a social purpose; and
                      (G)  conferring any particular benefit on society or the environment."

Section 21.101(a) of the TBOC now permits shareholders of a for-profit corporation to enter into an agreement governing the manner in which the corporation may exercise its power pursue a social purpose permitted by its certificate of formation.

Finally, Section 21.401 of the TBOC now authorizes directors and officers of a for-profit corporation to consider the social purpose of the corporation in discharging their duties to the corporation if such social purpose is stated in the corporation's certificate of formation.

It will be interesting to see how many Texas for-profit corporations take advantage of this new flexibility permitting Texas corporations to seek to both "do good" and "do well."

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